This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

February 27, 2013

401(k) Plan Costs Fell in 2012

Plans of all sizes both saw declines in total plan costs, investment fees

Total plan costs for retirement plans have fallen in the last year, according to the 13th edition of the 401k Averages Book. Small plan costs fell slightly from 1.47% to 1.46%, while large plan costs fell from 1.08% to 1.03%. The range of expenses for small plans was between 0.38% and 1.97%. Large plan expenses ranged from 0.28% to 1.41%.

For small plan data in the 13th edition, the authors looked at plans with 50 participants and $2.5 million in assets. Large plans had 1,000 participants and $50 million in assets. In the 12th edition, small plan data was based on plans with 100 participants.

The drop in costs is due to a more experienced industry, Joseph Valetta, co-author of the book, told AdvisorOne on Wednesday.

“In the last couple of years, there’s been a greater focus on fees from a maturing industry,” Valetta said. “There are more experienced advisors who specialize in these plans, who have created awareness surrounding fees.”

Asset-based fees, including investment management fees, fund expense ratios, 12b-1 fees, wrap and advisor fees also fell. In small plans, average investment expenses fell from 1.38% to 1.37%. The average expense dropped from 1.05% to 1% for large plans.

Valetta noted that they saw greater compression in fees among large plans due to greater flexibility in pricing than among small plans.

The average expense for target-date funds in a small plan is 1.37%, while the average cost of a TDF in a large plan is 0.98%. Balanced funds are considerably more expensive at 1.45% in a small plan and 1.37% in a large plan.

The 13th edition of the 401k Averages Book, which has been published since 1995, is the first edition to separate target-date fund costs from the cost of traditional balanced and risk-based funds. “Since target-date fund usage continues to grow in 401(k) plans, we thought it was important to calculate the average cost of target-date funds available within 401(k) offerings,” co-author David Huntley said in a statement.

For advisors, a lot of the impact of the Department of Labor’s fee disclosure regulations occurred before they came into effect as advisors and sponsors hurried to make sure their plan fees were in order, Valetta said. “We saw a lot of changes prior to distribution [of disclosure documents]. Everyone takes really good care of their teeth right before they go to the dentist, too.”

He stressed that fees that were higher than average weren’t necessarily bad for a plan provided they were reasonable. “Advisors need to be proactive and let clients understand what their fees are and how they compare, and explain their value added,” he said. “Being proactive is better than sitting back and letting someone else define your value proposition.”

Sign up now—it's Free!

Sponsor Showcase

ThinkAdvisor's TechCenter is an educational resource designed to give you a competitive edge by keeping you abreast of new tech innovations and need-to-know information that can be applied to your business.

Featured Video

At Prudential Advisors, we're dedicated to helping all our clients get on the path to achieve their goals."Prudential Advisors" is a brand name of the Prudential Life Insurance Company of America and its subsidiaries